Fueling Innovation and Growth: R&D Credits Explained (2026 Update)

The US tax code has long recognized that innovation is central to economic progress. Businesses engaged in research and development (R&D) activities can benefit significantly from the Research and Development Credit, a permanent incentive under Section 41 of the Internal Revenue Code designed to reward investment in new products, processes, and technologies. The Employee Retention Credit (ERC), introduced under the CARES Act in 2020 in response to COVID-19, has since expired and is no longer available for new claims as of 2026.

This article covers the R&D Credit, its eligibility requirements, how Form 6765 works under current US tax law, and how our team can help you capture every dollar you are entitled to.

The R&D Credit: Rewarding Innovation

The R&D Credit allows qualified businesses to reduce their federal income tax liability by offsetting a percentage of their qualified research expenditures (QREs). This directly improves cash flow and encourages continued investment in innovation across a wide range of industries, from manufacturing and technology to agriculture and healthcare.

Who Qualifies?

Businesses that conduct qualifying research activities may be eligible. Examples include:

• Developing new products, services, software, or formulas
• Conducting laboratory experiments aimed at technological advancement
• Improving or extending the performance of existing products or processes

To qualify, the following conditions must be met:

• Domestic Activities: R&D must be performed within the United States.
• Purposeful Experimentation: The activity must aim to eliminate uncertainty around technological capability or design.
• Substantial Business Component: The research must relate to a product or process intended for use in the taxpayer’s trade or business, with realistic potential for commercial application.

Eligible expenses typically include employee wages allocated to qualifying research, supplies consumed during the research process, and contract research costs paid to third parties.

Calculating the R&D Credit

The credit is calculated as a percentage of QREs using one of two IRS-approved methods:

• Regular Research Credit (RRC): A 20% credit on QREs that exceed a base amount, calculated using the company’s average gross receipts and historical R&D spending. This method can yield a larger credit but requires more historical data.
• Alternative Simplified Credit (ASC): A 14% credit on QREs that exceed 50% of the average QREs from the prior three tax years. This method is simpler to calculate and is often preferred by companies without extensive historical records.

For startups with less than $5 million in gross receipts over the prior five tax years, a 25% credit on all QREs is available without a base amount calculation. Qualifying startups can also apply up to $500,000 of the credit against payroll taxes, making this particularly valuable for early-stage companies that may not yet have significant income tax liability.

The choice of method depends on your company’s specific circumstances and history of research spending. A tax professional can model both scenarios to determine which produces the better outcome.

Form 6765: Claiming Your R&D Credit

Form 6765, titled “Credit for Increasing Research Activities,” is the required form for claiming the R&D Credit and is attached to the company’s federal income tax return (Form 1120 for corporations). It captures detailed information about qualifying activities and the calculations used to determine the credit amount.

Starting with the 2024 tax year, the IRS introduced expanded reporting requirements on Form 6765, including more granular disclosure of business components and employee information. Thorough documentation is more important than ever, including project descriptions, employee time allocation records, and supporting financial documentation, all of which should be retained in the event of an IRS audit.

A Note on the ERC

The Employee Retention Credit helped businesses retain employees during the pandemic years of 2020 and 2021 by providing a refundable payroll tax credit for wages paid during qualifying periods. It is no longer available for new claims. The IRS has significantly tightened enforcement around retroactive ERC claims filed on amended Form 941-X returns, and businesses with claims still in process should seek professional guidance to assess their exposure.

How We Can Help

Claiming these credits requires careful documentation, precise calculation, and strict adherence to IRS guidelines. Our specialized tax services include:

• Eligibility Assessment: Determining whether your business activities and circumstances qualify for the R&D Credit and identifying the calculation method best suited to your situation.
• Documentation Support: Assisting in the collection and organization of records needed to substantiate your claim, including project documentation, payroll records, and expense categorization.
• Credit Calculation: Accurately calculating your credit under both the RRC and ASC methods and selecting the approach that maximizes your benefit.
• Tax Form Preparation and Filing: Preparing and filing Form 6765 alongside your corporate return, ensuring full compliance with current IRS requirements.
• Audit Defense: Providing support and representation if your R&D Credit claim is subject to IRS review.

For guidance specific to your situation, contact the team at Dimovtax.com to ensure you are capturing every credit you are entitled to while avoiding costly compliance pitfalls.